Green premium

Our research finds clear evidence of a green premium in the two largest office building markets, New York and London, driven by tenant requirement and legislation. This highlights the importance to property owners of incorporating and considering the sustainability impacts of their buildings into their overall approach.

In 2021, Bill Gates authored How to Avoid a Climate Disaster, a plan for the world to reduce net CO₂ emissions and avoid a climate catastrophe. One of the key ideas in his book was that of a ‘green premium’. The green premium, in a real estate context, is described as the higher price that companies pay when renting or buying buildings with certified sustainability credentials that align with their values (BCLP, 2023).

Our research finds clear evidence of a green premium in the two largest office building markets, New York and London. The report examines 1,453 office building transactions in New York and London between 2010 and 2022, running a regression to analyze the economic implications of environmentally certified commercial real estate while controlling for a wide range of factors.

On a price per square foot basis, New York and London see material green premiums of 28% and 19% respectively (all else being equal; i.e.. location, age, renovation, occupancy, and lease length). This relationship aligns with the findings of a recent report by MSCI – based on London transactions – which found a 25% or higher gap in sale prices for those with a sustainability certification from BREEAM than those without (Leahy, 2022). This is supported by BREEAM’s finding that developers of certified buildings reported sales prices up to 30% higher vs. non-certified buildings, and value retention was indicated as a main benefit of certification by 38% of surveyed property owners (Soulti and Leonard, 2017).

While there are numerous factors that can drive green premiums, this report focuses on two of the most prominent – tenant requirement and legislation. As of June 2023, around 149 countries had announced net zero targets, covering close to 88% of global emissions (Net Zero Stocktake, 2023). As real estate drives approximately 39% of total global emissions (McKinsey, 2022), it is logical that countries and companies alike will focus on real estate as a critical way of reducing their footprint.

If these tenant and regulatory levers succeed, we will see ‘green’ real estate becoming the norm, which indeed is already the common expectation across many markets. For investors buying energy inefficient properties in New York and London, 1-3% discount in annualized return forecast through 2030 (relative to efficient) seems prudent to account for the retrofit cost needed to ‘green’ the asset.